Dream Industrial REIT (DREUF:OTCMKTS;DIR.UN:TSX) "delivered another solid quarter" in Q1/23, and its "growth outlook remains strong," reported Echelon Capital Markets analyst David Chrystal in a May 3 research note.
"We continue to like the REIT's outsized organic growth profile, high-quality global portfolio, value-add development pipeline, and growing stream of fee income," Chrystal wrote.
Accordingly, Echelon maintained its Buy rating and CA$17 per share target price on the industrial real estate investment fund, currently trading at about CA$14.82 per share. The price difference reflects a potential 19% return for investors.
Quarterly Performance Encouraging
Q1/23 results were strong and noteworthy for double-digit, year-over-year (YOY) organic growth in net operating income (NOI), Chrystal wrote and presented the highlights.
Specifically, the REIT's funds from operations during Q1/23 were up 13% from Q1/22 and beat both Echelon and consensus' expectation.
During Q1/23, market rents for Dream's portfolio rose about 2.5% quarter over quarter and about 23% YOY.
"The current mark-to-market opportunity remains close to 40% despite significant lifts on recent leasing activity," Chrystal wrote.
Those lifts during Q1/23 averaged 41% on 900,000 square feet (900 Ksf) of new/renewal leasing. Ontario and Quebec had the most leasing activity.
"Leasing success continues to drive outsized organic NOI growth, highlighting the strength of underlying fundamentals," Chrystal reported, "led by Ontario (+22%) and Europe (+12%)."
The REIT brought in CA$1.6 million (CA$1.6M) in net property management fees during Q1/23.
Accretive Portfolio Addition
During Q1/23, the REIT acquired 10% of the newly established Dream Summit Joint Venture, "which is already proving successful," noted Chrystal. Already since closing, 500 Ksf worth of leases were finalized at a 150% lift.
"Dream will benefit from the organic growth of the underlying portfolio as well as a growing stream of property management fees on the 90% of the platform that it does not own," Chrystal pointed out.
Several Growth Drivers
Looking forward, continued growth is expected for the REIT, wrote Chrystal. That will come, in part, from developments in the two-year pipeline, encompassing nearly 3,000,000 square feet (3 Msf) of the gross living area of intensification, redevelopment, and new development projects, with a total estimated cost of about CA$600M. Also in the works is preliminary planning for another 900 Ksf of opportunities in Europe.
"Management expects average unlevered yields of about 6.5%, suggesting incremental annual net operating income of nearly CA$40M," wrote Chrystal.
Upcoming expired leases through 2026, within the REIT's wholly owned portfolio and its interest in the Dream Summit Joint Venture, with lifts of 45%-plus of gross living area, also present a growth opportunity.
Another growth contributor will be annual rent increases, estimated at about 2–3%.
"This should support several years of high single-digit to low double-digit organic NOI growth," wrote Chrystal.
Also, property management fee revenue is expected to rise considerably over time.
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Disclosures for Echelon Capital Markets, Dream Industrial REIT, May 3, 2023
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ANALYST CERTIFICATION
Company: Dream Industrial Real Estate Investment Trust | DIR.UN-TSX
I, David Chrystal, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
IMPORTANT DISCLOSURES
the Analyst or any member of the Analyst’s household has a financial interest in the securities of the subject issuer: Long position; Trust Units.
